Private credit lenders expect surge in ‘last mile’ finance

Reuters/Ahmed Yosri

• Building projects often need extra funds
• Non-bank lending eases liquidity crunch
• Demand set to rise in Saudi and UAE

Private credit firms are preparing for a surge in demand for “last mile” financing from construction companies across the Middle East.

This form of financing plays a critical role in the delivery of projects that are on the brink of completion but have been hit by budget overruns or unforeseen costs.

William Watson, a partner in the Dubai office of law firm White & Case, told AGBI the practice was in talks with international private credit providers who “expect an increased demand” in Saudi Arabia, the UAE and elsewhere in the Gulf.

• Dubai launches $1.5bn of housing projects
• Giga-projects squeeze liquidity for Saudi banks
• Project overruns remain but payment issues improve

Providers “are particularly focused on the need for current and proposed levels of key construction and development to be completed in both jurisdictions”, said Watson, especially given “global interest and inflation trends”.

Private credit is non-bank lending, where investors step in to alleviate liquidity crunches.

Naveen Bhojwani, managing director of debt advisory, restructuring and special situations for emerging markets at Rothschild & Co, said “last mile” finance and opportunities in real estate “remain very interesting”.

Bhojwani pointed to projects where developers had “done a runner”, but also to the Gulf’s record on payment delays.

Receivable days – the number of days that an invoice remains unpaid – can “go north of 350 to 400 days” even on projects “with good-quality contracting firms” and creditworthy clients, he said.

“The extent of the receivable days here has always been a problem, so that working capital dynamic has often been the trigger,” Bhojwani said.

Vikas Papriwal, senior managing director at FTI Consulting, Middle East and Africa, added that construction firms were still facing “legacy payment issues” from previous development cycles.

He warned that Gulf states were susceptible to global monetary policy trends, despite benefiting from high oil prices. Regional headwinds are only “delayed”, he said.

The Middle East is among the worst-performing regions for construction delays, according to a 2023 report.

Construction overruns added 82 percent to schedules in the Gulf, well up on the global average of just over 67 percent.

A series of restructurings have taken place across the industry, with developers such as Union Properties and Falconcity World of Wonders adjusting their strategies to respond to market shifts.

Contractors such as Drake & Scull continue to struggle while Arabtec, best known for building the Burj Khalifa, ceased operations during the Covid pandemic.

White & Case’s Watson added that the UAE’s plan to set up a specialist bankruptcy court, part of the overhaul of its restructuring laws, had been welcomed by creditors and industry figures.

“The most common concern raised to us by private credit providers has been a perceived lack of effectiveness of regional insolvency regimes,” he said, adding that the new laws have yet to be tested.